The Big Squeeze on FedEx

December 19th, 2008 by

We have frequently blogged the labor issues at FedEx, the ubiquitous delivery giant. FedEx relies on “independent contractor” drivers for business and neighborhood deliveries. An interesting article by Corey Dade in the Wall Street Journal (subscription required) discusses the potential impact of a Democratic Congress on FedEx’s business model. An 800 pound gorilla has just taken a seat in the board room beside FedEx CEO Fred Smith.
FedEx began 35 years ago as an airline. As such, it fell under the Railway Labor Act of 1926, which made unionization of public and commercial transport companies extremely difficult. By contrast, UPS began as a trucking company and was subject to the National Labor Relations Act from day one. UPS is unionized: they pay workers more than FedEx, they provide better benefits. (Of course, the Wall Street Journal points out that these higher wages and benefits have hurt the growth of UPS stock.)
With the pending Democratic control of Congress, FedEx finds its business model under fire. Representative James Oberstar (D-Minnesota) will propose an amendment to the Federal Aviation Administration Act that would remove truck drivers, couriers and other FedEx employees from the Railway Labor Act. In other words, the door to unionization will be thrown wide open.
The Journal article does not mention the difficulties that FedEx has had in state courts, where their so-called “independent contractor” drivers, who wear FedEx uniforms and drive FedEx trucks, have been consistently found to be FedEx employees. FedEx finds itself caught in a big squeeze: potential changes in enabling legislation opening the door to unions plus state level pressures to reclassify 15,000 drivers as employees. The entire business model is at risk.
FedEx has remained profitable during the recent downturn, posting a 3% increase in net income. Nonetheless, CEO Smith has voluntarily reduced his own salary by 20% and has given up his bonus. The company has also cut wages for all employees and stopped contributing to employee retirement plans. Because the workforce is union-free, the company has been able to react quickly and unilaterally to reduce (payroll) expenses.
This type of maneuvering would be much more difficult – if not impossible – under a unionized workforce. Rates of pay, benefits and working conditions are all subject to collective bargaining – never a speedy process when take-aways are on the table. It’s ironic that the very flexibility that keeps FedEx profitable during this economic downtime is also the source of FedEx’s troubles in the long run. It’s always difficult to predict the future, but the 800 pound gorilla stalking FedEx appears ready to light up a cigar.